Planning for school fees

We know that our country is full of brilliant public schools, many of you probably attended one! But, 7% of British children now attend a fee-paying school and education costs is a hot topic with our clients.

We regularly answer questions such as how much will it cost? Will this cost increase and by how much? When should I start saving for my child’s education and what’s the best way of doing this? So, let’s dig a little deeper on how we can help with these issues…

Charges

Where you live can have a huge impact on the fees you pay and of course the level of education plays a part. According to the Independent School’s Council (ISC) the East of England and London saw the biggest rise in fees in 2018, with places such as Wales and the North West seeing the smallest increases.

Below you can see the average termly fees for different ISC schools across the UK in 2018:

We can all do the maths… the costs can easily total into the hundreds of thousands. Some children may be lucky enough to qualify for bursaries or scholarships, but in the majority of cases we come across, the family are footing the bill.

So, what are the options for planning? Trusts can be a great way to plan for school fees, and we’ve highlighted two types that could be suitable.

Bare Trusts

What are they?

• Assets held by trustees (parents, grandparents etc) for the benefit of the child

The facts

• There is no limit on how much you can put in
• Trustees can pay out money from the trust as required
• At age 18 the child will legally own the trust so they must be aware the fund exists

Tax implications

• Assets in a bare trust are taxed as if they are the child’s, with one exception. That’s if the parent gifts the money and the income from this exceeds £100 per year, it will be taxed at the parent’s marginal rate and will need reporting on their tax return (until the child is age 18). This is one reason that bare trusts tend to be preferred by grandparents
• Excluding this exception, bare trusts can be very tax efficient. It’s unlikely that the child will have income in their own name meaning they won’t pay income tax on the assets
• Cash transferred into the trust could fall under one of these inheritance exemptions; £3k or income outside of your normal expenditure can be gifted and will immediately fall outside your IHT obligations. If it doesn’t fall under one of these exemptions it will be a potential exempt transfer (PET). A PET requires the gift donor to survive 7 years beyond making the gift, for it to fall outside of their estate for IHT purposes

Discretionary Trusts

What are they?

• Assets held in a discretionary trust are also held by trustees for the benefit of the beneficiaries. The main difference here is that at age 18 the trustees maintain control and the child can’t access the funds.

The facts

• Transfers into the trust are treated as a chargeable lifetime transfer. Transfers over £325k can cause an immediate charge to IHT so care needs to be taken to avoid this
• Discretionary trusts offer greater flexibility and control when it comes to distributing your wealth but they do require professional advice regarding tax and maintenance rules
• They can include a wide range of beneficiaries which makes them very flexible

Tax implications

• Discretionary trusts attract the top rate of income tax, and capital gains tax. The tax bill for a trust can be kept to a minimum through careful investment planning and timing of contributions and withdrawals
• Tax on income paid from the trust can be reclaimed by the beneficiary depending on their rate of income tax
• Depending on the type and structure of investment, significant savings are possible in terms of IHT

So, what next?

These are just a couple of the options available to you if you are thinking of providing child with a paid education. Of course, you could simply set aside a pot of money, but ask yourself, is this the most tax efficient way of planning?

Whether you’re a grandparent wanting to put money away or parents looking to the future, we can help you with the planning.

We’d love to hear from you if you have any questions or would like to have a chat.

This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information.